Supplementary analyses
(a) Life new business premiums
Under the EEV principles, new business margins are required to be disclosed
as a percentage of the present value of new business premiums (PVNBP). The
present value of new business premiums is derived from the single premiums
and regular premiums of the products sold during the financial period and is
expressed at the point of sale.
The PVNBP calculation is equal to total single premium sales received in the year plus the discounted value of regular premiums expected to be received over the term of the new contracts. The premium volumes and projection assumptions used to calculate the present value of regular premiums for each product are the same as those used to calculate new business contribution, so the components of the new business margin are on a consistent basis.
The discounted value of regular premiums is also expressed as annualised regular premiums multiplied by a Weighted Average Capitalisation Factor (WACF). The WACF will vary over time depending on the mix of new products sold, the average outstanding term of the new contracts and the projection assumptions. The table below sets out the factors required to derive the present value of regular premiums by business units, and combined with single premium sales derives the present value of future new business premiums.
| 31 December 2004 | |||||
|---|---|---|---|---|---|
| Regular premiums £m |
Weighted average capitalisation factor | Present value of regular premiums £m |
Single premiums1£m | Present value of new business premiums £m |
|
| United Kingdom | |||||
| Individual pensions | 265 | 5.2 | 1,373 | 1,742 | 3,115 |
| Group pensions | 88 | 5.0 | 440 | 540 | 980 |
| Annuities | - | - | - | 1,278 | 1,278 |
| Bonds | - | - | - | 2,260 | 2,260 |
| Protection | 163 | 5.3 | 857 | 682 | 1,539 |
| Total life and pensions | 516 | 5.2 | 2,670 | 6,502 | 9,172 |
| France | |||||
| Eurosavings | 15 | 5.0 | 75 | 1,745 | 1,820 |
| Unit-linked savings | 30 | 5.0 | 150 | 668 | 818 |
| Protection business | 17 | 6.1 | 103 | 41 | 144 |
| Total life and pensions | 62 | 5.3 | 328 | 2,454 | 2,782 |
| Ireland | |||||
| Life and savings | 18 | 6.3 | 114 | 54 | 168 |
| Pensions | 48 | 5.1 | 244 | 149 | 393 |
| Total life and pensions | 66 | 5.4 | 358 | 203 | 561 |
| Italy | |||||
| Life and savings | 45 | 6.0 | 270 | 1,529 | 1,799 |
| 45 | 6.0 | 270 | 1,529 | 1,799 | |
| Netherlands (including Belgium and Luxembourg) | |||||
| Life | 96 | 6.8 | 651 | 467 | 1,118 |
| Pensions | 52 | 7.4 | 386 | 664 | 1,050 |
| Total life and pensions | 148 | 7.0 | 1,037 | 1,131 | 2,168 |
| Poland | |||||
| Life and savings | 15 | 4.4 | 66 | 40 | 106 |
| Pensions | 16 | 7.2 | 115 | 20 | 135 |
| Total life and pensions | 31 | 5.8 | 181 | 60 | 241 |
| Spain | |||||
| Life and savings | 52 | 5.7 | 297 | 1,061 | 1,358 |
| Pensions | 39 | 6.3 | 247 | 505 | 752 |
| Total life and pensions | 91 | 6.0 | 544 | 1,566 | 2,110 |
| Other Europe | |||||
| Life and pensions | 90 | 5.2 | 468 | 336 | 804 |
| International | |||||
| Life and pensions | 105 | 3.7 | 390 | 660 | 1,050 |
| Total | 1,154 | 5.4 | 6,246 | 14,441 | 20,687 |
| 1 United Kingdom includes single premiums of £478 million in respect of NUER included in Protection business. | |||||
(b) Analysis of service companies and fund management businesses within embedded value
The EEV methodology incorporates the impact of profits and losses arising
from subsidiary undertakings providing administration, investment management
and other services where these arise in relation to covered business. The principal
subsidiaries of the Aviva group providing such services are NU Life Services
Ltd (UK), Morley Fund Management (UK) and Aviva Gestion d’Actifs (France).
The following table provides an analysis of the elements within the life and
other related business embedded value:
Full year 2004 |
Full year 2003 |
||||
|---|---|---|---|---|---|
| Fund Management £m |
Non-Insurance £m |
Total £m |
Total £m |
||
| United Kingdom | 54 | (397) | (343) | (388) | |
| France | 45 | (13) | 32 | 27 | |
| Other Europe and International | 6 | (21) | (15) | (21) | |
| 105 | (431) | (326) | (382) | ||
The “look-through” value attributable to fund management is based on the level of after-tax profits expected to be earned in the future over the outstanding term of the covered business in respect of services provided to the Group’s life operations. The EEV basis profit and loss account excludes the actual statutory basis profits arising from the provision of fund management services to the Group’s life businesses. The EEV profit and loss account records the experience profit or loss compared to the assumed profitability, the return on the in-force value arising from the unwind at the relevant risk discount rate and the effect on the in-force value of changes to economic assumptions.
NU Life Services Ltd (NULS) is the main provider of administration services to the UK Life business. NULS incurs substantially all of the UK Life business’ operating expenditure, comprising acquisition, maintenance and project costs. Costs are recharged to the UK Life companies (the product companies) on the basis of pre-determined Management Services Agreement (MSA) which was negotiated in 1998 and will be reviewed in 2008.
The EEV principles “look-through” the contractual terms of the MSA to the underlying expenses of NULS. Accordingly the actual maintenance expenses and a “normal” annual level of project expense allowances have been applied to the product companies. Under EEV, any further one-off project expenditure is reported as experience losses when incurred.
(c) Treatment of pension scheme deficit in embedded value
The adoption of the EEV principles and the inclusion of NULS in the calculations
have resulted in the recognition within EEV of the future funding obligations
to the UK pension scheme in relation to both future service costs and pension
deficits. The table below shows the component parts of the impact of adopting
the EEV principles on the UK life valuation.
| 31 December 2004 £m |
31 December 2003 £m |
|
|---|---|---|
| Impact of: |
||
| Increasing maintenance and normal project allowances | (124) | (182) |
| Increase in future service pension scheme contribution rate from 11% to 25% | (126) | (117) |
| (250) | (299) | |
| Pension scheme deficit funding | (147) | (137) |
| (397) | (436) |
Under the Modified Statutory basis, pension costs are accounted in NULS in accordance with SSAP24. This results in a pension cost charge to the statutory result of NULS of 11% of pensionable salaries for 2004 (2003: 11%). The funding rate for the annual pension cost was increased to 25% of pensionable salaries with effect from 1 January 2003.
In accordance with SSAP24, only 11% of pensionable salaries are charged to the profit and loss account with the remaining 14% treated as prepayment. Under the EEV methodology, allowance has been made for the entire contribution reducing the embedded value of UK Life and related business at 2004 by £126 million (31 December 2003: £117 million).
In addition, pension deficit funding equivalent in 2004 to a further 13% of pensionable salaries commenced on 1 January 2004. The NULS share of the total UK pension scheme deficit is approximately 42% and this liability is fully provided for in the UK embedded value. In effect, under the EEV methodology the element of the pension fund deficit which relates to the UK life and other related businesses is now incorporated within shareholders’ funds at an amount equivalent to the post-tax contributions discounted using the UK Life business risk discount rate. This is equal to £147 million at 31 December 2004 (2003: £137 million), which differs from the FRS17 basis of evaluating pension deficits.
In quantifying the impact on the embedded value for the UK covered business, the shareholders have been assumed to incur all of the additional contributions except for an amount equivalent to approximately 2% of pensionable salaries which has been attributed to the with-profits funds. This reflects the contractual nature of the current MSA which prevents shareholders from recharging both the increase in future service costs from 11% to 25% of pensionable salaries and the cost of funding the deficit to the UK with-profit funds.
Under the MSA, NULS can renegotiate the terms relating to the recharging of the costs to the UK with-profit funds in 2008, subject to regulatory approval. In evaluating the impact on EEV, Aviva has not sought to pre-empt the outcome of this renegotiation. Any changes to the recharges in respect of the pension costs and the pension deficit to the with-profits funds will be reported as profits or losses in the period agreement is obtained.
The Group continues to account for its pension scheme costs in accordance with SSAP24. The following table sets out the impact of adjusting the pension scheme on a FRS17 basis for the adoption of calculating the deficit under the EEV principles.
| Full year 2004 £m |
Full year 2003 £m |
|
|---|---|---|
| FRS17 pension scheme deficit post tax | (619) | (583) |
| Element relating to UK life covered business | 216 | 211 |
| Element relating to non-life business | (403) | (372) |
| Deduct: SSAP24 prepayment | (279) | (251) |
| Deduction required from restated shareholders’ funds to incorporate pension deficit in full as a liability | (682) | (623) |
| Total shareholders’ funds on an EEV basis | 14,119 | 11,705 |
| Total shareholders’ funds on an EEV basis including pension liability on FRS17 basis | 13,437 | 11,082 |
The element of the FRS17 pension scheme deficit relating to covered business in Ireland and the Netherlands has not been adjusted for in the table above, as the funding arrangements in these territories have not changed.
(d) Pension schemes – MSSB basis
The
group continues to account for
its pension costs in accordance
with SSAP24. The effect on the
group’s
MSSB net assets of substituting
the FRS17 figures for the corresponding
SSAP24 balance sheet entries
would be as follows:
| Net assets | ||
|---|---|---|
| 2004 £m |
2003 £m |
|
| Total included on the MSSB balance sheet | 9,244 | 7,365 |
| Less: pension net asset on SSAP24 basis | (279) | (251) |
| Total excluding pension asset | 8,965 | 7,114 |
| Less: pension liability net of deferred tax on FRS17 basis | (619) | (583) |
| Total net assets on an MSSB basis including pension liability on FRS17 basis |
8,346 | 6,531 |
The pension net asset shown above is after deducting £56 million held within technical reserves in respect of future funding.
